Europe Slump Deeper Than Expected

Europe Slump Deeper Than Expected

Andrew Medichini/Associated Press
Finance ministers from the seven leading industrialized countries were meeting Friday at the Italian Finance Ministry in Rome. Italy is one of the countries hurt most by the recession.
By ERIC PFANNER
Published: February 13, 2009
PARIS — Europe sank even deeper into recession than the United States in the closing months of last year, according to figures published Friday, as finance ministers of leading industrialized nations gathered in one of the worst-affected countries, Italy, for discussions on the crisis.
Tony Gentile/Reuters
Timothy F. Geithner, the Treasury secretary, left, with Mario Draghi, the governor of the Bank of Italy, on Friday in Rome.
The economy of the 16 countries sharing the euro currency declined by 1.5 percent in the fourth quarter, according to the European Union’s statistics office. That is even worse than the 1 percent decline in the United States economy during that period, compared with the previous quarter.
“Today’s data wipes out any illusion that the euro zone is getting off lightly in this global downturn,” said Jörg Radeke, an economist at the Center for Economics and Business Research in London.
Until recently, some economists had thought that Europe might suffer less from the recession, which started in the United States before spreading to most of the rest of the world. While home prices have plunged in some European economies, including Britain, Ireland and Spain, housing markets have held up better elsewhere in Europe. Consumers have also cut back less on their spending in Europe than in the United States.
But instead, European industry has been walloped as businesses around the world, and particularly in the United States, cut back on new orders to bring down their inventories. That has hit euro-zone countries hard, particularly Germany, which relies on exports to fuel economic growth.
In Germany, the biggest economy in Europe, the economy shrank by 2.1 percent in the final three months of 2008, compared with the third quarter, when it had already contracted by 0.5 percent, according to the federal statistics office.
In an effort to arrest the plunge, the lower house of the German Parliament, the Bundestag, approved a 50-billion-euro stimulus plan, which includes new spending measures and tax cuts.
Germany was not the only European economy to do worse than analysts had expected in the period. In France, output declined by 1.2 percent, while Italy contracted by 1.8 percent.
The data “confirm that the recession in the region is deepening at an alarming rate,” said Jennifer McKeown, an economist at Capital Economics in London.
For the euro-zone economy, it was by far the worst quarter since the euro was introduced in 1999, and economists said they would have to go significantly further back in time to find a comparable period.
“For Europe, as for the rest of the industrialized world, this is surely the worst downturn since the Second World War,” Mr. Radeke said.
Drawing precise historical comparisons for the entire euro zone is challenging because of currency fluctuations before the single currency was introduced and because of incomplete or incompatible data from euro-zone members like Slovenia, which was not an independent country until 1991.
But Ms. McKeown said she had run the numbers for the major euro-zone economies back to 1970 and found only one other quarter that was even close to as bad as the latest one: the fourth quarter of 1974, when the economy was reeling from the oil shock and a plunge in stock prices. In that quarter, the main euro-zone economies fell by a combined 1.2 percent.
The 1.5 percent decline in the euro-zone economy matches the rate of contraction during the period in Britain, which has been additionally battered by the crisis in the financial sector, on which much of its economy depends.
The report from Germany on Friday showed a sharp rise in inventories — indicating that further bad news was in store for the first quarter, economists said.
That will give finance ministers of the Group of Seven leading industrialized nations, including the new United States Treasury secretary, Timothy F. Geithner, plenty to discuss this weekend during meetings in Rome. Among other things, the officials were expected to look at proposals for new financial market regulations and concerns about rising protectionist sentiment in some countries.
As the officials arrived on Friday, tens of thousands of workers marched through the streets of the Italian capital, snarling traffic and demanding action to ameliorate the crisis. With three consecutive quarters of declining output, Italy has been in a slump longer than some of its neighbors, like France, where the economy actually eked out a small gain in the third quarter.
“Compared to other countries, not enough has been done,” Mauro Bianchi, a representative of the CGIL union, told The Associated Press. “They are trying to cure a serious illness with aspirin.”
While Italy is in particularly bad shape, the severity of the downturn across the euro zone was driven home by the report Friday. On an annualized basis, economists said, the 1.5 percent decline in output would amount to a drop of roughly 6 percent — a significantly bigger fall than the 3.8 percent annual rate of contraction in the United States during the fourth quarter.
On a year-over-year basis, Europe also performed more poorly than the United States in the fourth quarter, with gross domestic product falling by 1.2 percent from the fourth quarter of 2007, compared with a comparable decline of 0.2 percent in the United States.
Europe typically lags behind the United States in recovering from recessions, Ms. McKeown said, so any return to growth in the euro zone is probably at least a year away.
“We had hoped that the euro zone might not do as badly as the U.S.,” she said. “As it turned out, the slump in the industrial sector has completely turned things around.”

New York Times Feb. 13th